Paying More than Necessary? The Wage Cushion in Germany

Abstract

In Germany, more than 40 per cent of plants covered by collective agreements pay wages above the level stipulated in the agreement, giving rise to a wage cushion between actual and contractual wages. Cross-sectional and fixed-effects estimations indicate that the wage cushion mainly varies with the profit situation of the plant and with indicators of labour shortage and the business cycle. Whereas plants bound by multi-employer agreements seem to pay wage premiums in order to overcome the restrictions imposed by the rather centralized bargaining system in (western) Germany, plants that use single-employer agreements are significantly less likely to have wage cushions.

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